Daron, Jim and Mitt

Mitt said that Israeli and Palestinian and Mexican and US economic outcomes differ because of cultural differences. This immediately brought to mind the recent book by Daron and Jim, “Why Nations Fail” because they begin by comparing Nogales Arizona and Nogales Mexico. These have quite similar geography, quite similar culture and yet very different GDPs. Daron and Jim argue this is because of vastly different political and economic institutions. Now Daron and Jim have addressed the issue themselves on their blog. They offer a couple of more examples:

But as we show in Why Nations Fail, cultural differences cannot explain differing levels of prosperity. Deng Xaioping didn´t change Chinese culture after 1978 to make the economy grow, but he did change economic institutions a lot. Indeed, many cultural differences we see are the outcomes of different institutional choices. This is surely the case between North and South Korea, for example. After all, does Mitt and David think that there were huge cultural differences between the north and the south of the 38th parallel before the separation of Korea into two?

I guess we need a convincing example of a situation where two countries have the same geography, the same institutions, but different cultures and vastly different economic outcomes.

Comparison between India and Pakistan may provide good insights. Before the partition Muslims and Indians lived in the same geography and under the same institutions. After the partition Muslims took Pakistan in one direction, shaping both its institutions and wealth, while Indians took India in a different direction.

Institutions do not fall from the sky nor can they be imposed willy nilly. Obviously institutions matter. The relevant question is why certain institutions develop and when certain institutions or changes in institutions can be maintained.